Tricks with Hicks: The EASI Demand System

We invent Implicit Marshallian demands, which combine desirable features of
Hicksian and Marshallian demands. We propose and estimate the Exact Affine
Stone Index (EASI) implicit Marshallian demand system. Like the Almost Ideal
Demand (AID) system, EASI budget shares are linear in parameters given real
expenditures. However, unlike the AID, EASI demands can have any rank and
its Engel curves can have any shape over real expenditures. EASI error terms
equal random utility parameters to account for unobserved preference heterogeneity.
EASI demand functions can be estimated using GMM or three stage
least squares, and, like AID, an approximate EASI model can be estimated by
linear regression. (JEL D11, D12)